Absorptive Capacity: A New Perspective on Learning and Innovation Cohen and Levinthal (1990) Administrative Science Quarterly Presented by Hyeonsuh Lee

Background The ability to exploit external knowledge is a critical component of innovative capabilities. Prior related knowledge confers an ability to recognize the value of new information, assimilate it, and apply it to commercial ends. Absorptive capacity The ability to assimilate information is a function of the richness of the pre-existing knowledge structure Learning is cumulative Learning performance is greatest when the object of learning is related to what is already known

Organizational absorptive capacity Sources of a firm’s absorptive capacity The structure of communication between the external environment and the organization among the subunits Character and distribution of expertise within the organization The level of organizational absorptive capacity = f (gatekeeper’s capabilities, expertise of individuals to whom the gatekeeper is transmitting the information) Environment Firm

Organizational absorptive capacity Tradeoff between inward-looking vs. outward-looking absorptive capacities While some overlap of knowledge across individuals is necessary for internal communication, there are benefits to diversity of knowledge structures across individuals that parallel the benefits to diversity of knowledge within individuals. Cross-function absorptive capacities: necessitates redundancies as overlaps, requires depth AND breadth of knowledge for effectiveness A critical component of the requisite absorptive capacity is sometimes firm-specific and therefore cannot be bought and quickly integrated into the firm.  Critical complementary knowledge is acquired only through experience within the firm.

Path dependence and absorptive capacity Two features of absorptive capacity: 1) cumulativeness, 2) effect on expectation formation  Implies that its development is domain-specific and is path-dependent. Firm may not be aware of the significance of signals that would otherwise revise its expectations. The lack of early investment in absorptive capacity makes it more costly to develop a given level of it in a subsequent period. The greater the organization’s expertise and associated absorptive capacity, the more likely its aspirational level will be defined in terms of the opportunities present in the technical environment rather than strictly in terms of performance measures.

Absorptive capacity and R&D investment R&D not only generates new knowledge but also contributes to the firm’s absorptive capacity. Determinants of R&D intensity: Demand: level of sales, price elasticity of demand Appropriability: degree to which firms capture the profits associated with their innovative activity, the degree to which valuable knowledge spills out into the public domain. Technological opportunity: Quantity of extra-industry technological knowledge complementing and leveraging knowledge output of the firm; Degree to which unit of new knowledge improves technological performance of firm’s manufacturing processes or products, thus profits

Model How absorptive capacity affects the determination of R&D expenditures.

Model Model of sources of a firm’s technical knowledge. Direct effect of ease of learning: the marginal impact of R&D on absorptive capacity is greater in more difficult learning environments. Technological opportunity: increase in technological opportunity  more R&D in more difficult learning environments  increased incentive to build absorptive capacity. Appropriability: the more of its competitors’ spillovers there are out there, the more incentive the firm has to invest in its own R&D, which permits it to exploit those spillovers.

Method Data: Cross-sectional survey from American manufacturing sector by Levin et al. (1983,1987) and FTC’s Line of Business Program data on business unit sales, transfers, and R&D; 1975-1977 Sample: 1,719 Business units representing 318 firms in 151 lines of business DV- R&D Intensity: R&D expenditures as a percentage of business unit sales & transfers IVs: Technological Opportunity: Relative quantity of useful knowledge index Intra-industry Spillovers: Competitive advantage protection strength; APPROPRIABILITY Ease of Learning: Assumption that learning is less difficult for applied vs basic science relevant industries Interdependence: Four-firm concentration ratio & industry-level estimates of price elasticity of demand Models: OLS, GLS adjusting for heteroscedasticity, and Tobit for observations with 0 R&D

Results

Discussion Linkages to Dierickx & Cool’s (1989) asset stock accumulation. Similar conceptualizations: absorptive capacity is firm-specific therefore firms need to build it, asset mass efficiencies, time compression diseconomies … Alternative measures for technological opportunity (relevance, importance), ease of learning, intra-industry spillovers of R&D? This research provides implications of organizational design to facilitate external boundary-spanning as well as internal communication.